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# MyChapter_17 - CHAPTER 17 COST-VOLUME-PROFIT ANALYSIS...

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CHAPTER 17 COST-VOLUME-PROFIT ANALYSIS QUESTIONS FOR WRITING AND DISCUSSION 1. CVP analysis allows managers to focus on prices, volume, costs, profits, and sales mix. Many different “what-if” questions can be asked to assess the effect on profits of changes in key variables. 2. The units-sold approach defines sales volume in terms of units of product and gives answers in these same terms. The sales- revenue approach defines sales volume in terms of revenues and provides answers in these same terms. 3. Break-even point is the level of sales activity where total revenues equal total costs, or where zero profits are earned. 4. At the break-even point, all fixed costs are covered. Above the break-even point, only variable costs need to be covered. Thus, contribution margin per unit is profit per unit, provided that the unit selling price is greater than the unit variable cost (which it must be for break-even to be achieved). 5. The contribution margin is very likely negat- ive (variable costs are greater than revenue). When this happens, increasing sales volume just means increasing losses. 6. Variable cost ratio = Variable costs/Sales. Contribution margin ratio = Contribution mar- gin/Sales. Also, Contribution margin ratio = 1 – Variable cost ratio. Basically, contribution margin and variable costs sum to sales. Therefore, if contribution margin accounts for a particular percentage of sales, variable costs account for the rest. 7. The increase in contribution margin ratio means that the amount of every sales dollar that goes toward covering fixed cost and profit has just gone up. As a result, the break-even point will go down. 8. No. The increase in contribution is \$9,000 (0.3 × \$30,000), and the increase in advert- ising is \$10,000. This is an important ex- ample because the way the problem is phrased influences us to compare increased revenue with increased fixed cost. This com- parison is irrelevant. The important compar- ison is between contribution margin and fixed cost. 9. Sales mix is the relative proportion sold of each product. For example, a sales mix of 4:1 means that, on average, of every five units sold, four are of the first product and one is of the second product. 10. Packages of products, based on the expec- ted sales mix, are defined as a single product. Price and cost information for this package can then be used to carry out CVP analysis. 11. A multiple-product firm may not care about the individual product break-even points. It may feel that some products can even lose money as long as the overall picture is profit- able. For example, a company that produces a full line of spices may not make a profit on each one, but the availability of even the more unusual spices in the line may per- suade grocery stores to purchase from the company. 12.

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MyChapter_17 - CHAPTER 17 COST-VOLUME-PROFIT ANALYSIS...

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